Fixing California’s Growing Insurance Crisis

The State Needs Free Markets—Not More Regulations—to Solve the Problem

By Adam Summers of the Independent Institute. 

"California’s insurance crisis keeps getting worse. State Farm, the largest insurer in the state, just revealed that it will not be renewing 72,000 home insurance policies in California. State Farm had already announced in January that it would no longer be issuing new policies in the state, joining other major insurance companies such as Allstate, AIG and Chubb. In addition, The Hartford also stopped writing policies in California and Farmers Insurance, the second-largest insurer in the state, imposed a limit on the number of new policies written, starting July 2023. In all, seven of the 12 biggest insurers in the state have halted or restricted new business in California since 2022.

Many places across the country have experienced an increase in natural catastrophes in recent years, but California’s unique and extreme bureaucratic restrictions have made it less able to adapt to actual market conditions, throwing the home insurance industry into chaos and threatening the ability of homeowners to protect themselves from wildfires and other natural disasters. As a result, many Californians are finding it increasingly difficult—or even impossible—to obtain home insurance policies through the standard market.

This has strained the California FAIR Plan, an “insurer of last resort” for high-risk properties. The plan is now receiving an astounding 1,000 applications a day and currently insures 373,000 homes and businesses in the state—a total that has more than doubled since September 2019.

California’s insurance crisis largely stems from the inability of insurers to raise prices to more accurately reflect their risks, particularly as the number and cost of natural disasters such as wildfires has increased in recent years. The state’s price controls and delays in making decisions on rate increases have made it impossible even for major insurance companies to do business in California.

The crisis will only abate when California stops making it unprofitable or too risky for insurers to issue policies in the state. This means allowing prices to rise to more accurately reflect risk levels to insurers, which may be painful for some homeowners. However, that is still much better than the current calamity and shortages the state has caused, where many homeowners cannot get insurance at all.

California also needs to roll back Proposition 103, the 1988 ballot measure that imposed many of the government interventions which are destroying the home insurance industry today.

The state must also recognize how California’s notoriously difficult homebuilding climate exacerbates the insurance crisis. State and local (anti-)housing policies are pushing homeowners to live in more dangerous and risky areas. From restrictive zoning ordinances to prevailing wage laws that require more expensive union pay scales to be used in construction, to affordable housing mandates that require many units to be sold below market rates, to excessive building codes and environmental regulations such as the California Environmental Quality Act—which allows NIMBYs, anti-development groups, labor unions, and others to tie up housing projects in courts for years for reasons that have nothing to do with the environment—California has done just about everything it can to make housing less profitable, more scarce and thus more expensive. Consequently, people have increasingly fled to more exurban and rural areas, known as the wildland-urban interface, which are more affordable but also more prone to wildfires.

In other words, as with many other largely government-created problems California is facing—occupational licensing laws that restrict employment, the aforementioned housing policies that create a shortage of affordable housing, high minimum wage laws and other regulations that destroy businesses and jobs, etc.—what the Golden State really needs is free markets. Only that will offer people the best incentives to provide the highest-quality goods and services at the lowest prices. Doubling down on more laws, red tape and special-interest giveaways will only lead to more of the same: a high cost of living, diminished economic opportunities and a declining population, as people continue to flee to other states that offer more freedom and greater opportunities."